A "Miner" Adjustment
Bitcoin's fast approaching halving is going to have an impact in the mining space. I like three different names; a monster, a takeover target, and a small cap spec.
We’re roughly 4 or 5 days away from Bitcoin’s block reward halving. Have you guys heard of this? I kiid. Anyway, in classic crypto fashion it looks like there’s a chance the halving will be on 4-20… if the price of BTC is “69” thousand dollars at the same time then we’ll officially know this whole universe is a giant meme. There are actually a lot of you who have subscribed in the last few weeks so it’s possible the concept of the Bitcoin halving cycle is foreign to you.
I’ll now attempt to briefly summarize what this means before jumping into the real meat of the post. If you already get it, feel free to jump to the next section.
Bitcoin Halving Explained
Bitcoin was designed with a fixed supply of 21 million coins. This is a coded hard limit to the amount of BTC that will exist on chain - thus, the perception that BTC is a “store of value” due to it being the first truly scarce digital asset. There are about 19.7 million coins already in circulation and the remaining 1.3 million will be issued over time as new blocks are created on the blockchain. Computers, or “miners,” are rewarded with the new coins when they validate transactions on the ledger. Today, there are 6.25 new BTC issued through each new block. Next week, that figure will be down to just 3.125.
The newly issued coins, sometimes referred to as the block reward subsidy, are trimmed by 50% about every 4 years. Each time this has happened in the past, the price of BTC has gone into a mania that takes nominal BTC price to a new high. Why does this happen? To me, it’s equal parts supply crunch meets FOMO. The less BTC generated by the block reward subsidy, the less sell pressure from miners selling BTC to cover operational costs. So if demand from the public stays the same but supply diminishes, BTC rerates higher.
Validation Incentives
The halving has historically been a major bullish catalyst for the price of Bitcoin. How one views this block reward/halving dynamic is certainly up to interpretation. To make up for an ever diminishing block reward subsidy, it has become borderline essential for much higher coin prices so the miners continue to have an incentive for validating on-chain transactions. This is not a sustainable trend in my view. Mining BTC requires equipment and energy - neither of which are free.
Thus, an alternative incentive for transaction validation is required. This is why many other blockchains don’t require miners at all and are instead validated by a proof-of-stake model rather than the miner-driven proof-of-work model. No matter which model a chain creator chooses, if coin supply has a hard cap, transactions will ultimately have to be funded by usage fees.
Given the fact that the block subsidy will inevitably stop printing new BTC, I think it’s pretty clear that transaction fees will have to become a viable incentive mechanism for validation in the future. Otherwise, the security of the network is at a significant risk. Bitcoin has an absolutely enormous advantage in the zeitgeist. Even though there are other coins that are currently more profitable to mine, the computing power is almost all still backing BTC.
To be clear, I’m not going to sit here and make the claim that Bitcoin miners are going to all flip to Bitcoin Cash post-halving because they’ll make more money. But I will sit and here and make the claim that some of them probably will. Because the alternative is mining at a loss or simply not mining at all. Especially if the price of BTC comes down - which has been happening in recent days.
BTC at $52k out of the question? I think not.
Industry Consolidation?
One of the great things about the halving for miners is it’s a well-telegraphed event. If you think the market hasn’t already been pricing this into the two dozen or so public BTC mining companies yet with less than a week remaining, I’d be willing to take the other side of that argument.
Consider the price performances of Bitcoin compared with the public mining equities as expressed by the Valkryie Bitcoin Miners ETF WGMI 0.00%↑ - with a couple of notable exceptions, the miner group peaked in December when Bitcoin was $42k. Traders would have done a hell of a lot better flipping from miners to BTC near the end of 2023 rather than riding the mining shares down, or worse, chasing miners at the highs…
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